SAN FRANCISCO – As vehicle prices and interest rates increase in tandem – creating affordability issues in the process – it leaves many automotive consumers with “one lever”: longer financing terms, says Patrick Manzi, senior economist for the National Automobile Dealers Assn.
Not long ago, 24-month car loans were standard. Today, the current average is 69 months. Loans stretching to 72 and 84 months “are common these days,” Manzi notes at NADA’s annual convention and expo here.
It’s a two-edged sword. Longer loans push down monthly payments. That’s important because many car buyers are payment shoppers.
The downside for them is that the loan ends up costing more because of interest charges applied over a longer period.
The disadvantage for dealers and automakers is that longer interest terms extend buying cycles.
The qualified exception is that consumers opt to buy a new vehicle even though they still owe much on their current one. Rolling negative equity into a new car loan generally is considered inadvisable and heightens the likelihood of a default.
Despite such affordability issues, auto retailing is rocking. Manzi points to total U.S. dealer sales of $1 trillion last year when 17.3 million light vehicles were sold.
One weak spot is the decline of car sales, which now stand at 30% of the market.
Utility vehicles and pickups make up the majority. It has led to automakers General Motors, Ford and Fiat Chrysler pulling out of car production and focusing more on utility vehicles and pickups.
International brands such as Toyota, Honda and Hyundai continue to see sales success with cars, but it’s a falling segment, Manzi says, “We haven’t seen the bottom of the car market.”
Yet, various macroeconomic trends bode well for both U.S. new and used vehicle sales in 2019, he says. That includes a tight labor market that continues to increase wages, a major component of a healthy auto industry.
Back to those monthly payments A trend to watch this year is the widening gap in average monthly payments between new and used vehicles, Manzi says.
“This will likely result in more consumers, especially younger and more value focused consumers, shifting to the used vehicle market,” he says. “This is a great opportunity for dealers to get these customers into nearly-new certified-preowned vehicles.”